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Tuesday, April 20, 2010

Whose Special Interests, Mr. President?

Here's an item that should outrage liberals. The Democrats are desperately trying to pass a bill which will firm up regulation of certain large corporations. This reform is important because without it, those firms will be free to continue to commit enormous sums of money irrespective of the risk involved. The corporations invest in a large and pervasive industry. If they were to collapse, the shockwaves would be felt throughout the entire economy. Unfortunately, Republicans are using their filibuster power to prevent cloture and the bill is being blocked from passing.

Everything about this scenario is true except that the roles of the parties have been reversed. Republicans were pushing for reform and the Democrats were blocking it. The industry was the housing industry and the bill was a 2005 proposal to regulate GSEs like Fannie Mae and Freddie Mac.

A few days ago (4/15), I mentioned the two fundamental factors that caused the crash that pushed the economy into the recession - the Fed's easy money policy in 2003-2004 and the strong Democratic party support of recklessly managed GSEs. Here's part of an op-ed by AEI's Peter Wallison in today's WSJ examining the latter of the two.

[Also - Below is a link to a YouTube video showing a late 2004 House committee hearing showing Republicans pressing for investigations into the GSE scandals and Democrats trying to stop them. Among those featured in the video are Barney (I'd like to throw the dice a little longer) Frank and Maxine (If it aint broke don't fix it) Waters. The video has more than 3.5 million hits].

One chapter in this story took place in July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote—all Republicans in favor, all Democrats opposed. The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.

These authorities were necessary to control the GSEs' risk-taking, but opposition by Fannie and Freddie—then the most politically powerful firms in the country—had consistently prevented reform.

The date of the Senate Banking Committee's action is important. It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee's bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.

Why was there no action in the full Senate? As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.

Recently, President Obama has taken to accusing others of representing "special interests." In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because "the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis."

He should know. As a senator, he was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.